voting standards Flashcards
Majority voting for the election of directors is fast becoming the de facto standard in corporate board elections. In our view,
the majority voting proposals are an effort to make the case for shareholder impact on director elections on a company-specific basis.
While this proposal would not give shareholders the opportunity to nominate directors or lead to elections where shareholders have a choice among director candidates, if implemented, the proposal would allow
shareholders to have a voice in determining whether the nominees proposed by the board should actually serve as the overseer-representatives of shareholders in the boardroom. We believe this would be a favorable outcome for shareholders.
The number of shareholder proposals requesting that companies adopt a majority voting standard has
declined significantly during the past decade, largely as a result of widespread adoption of majority voting or director resignation policies at U.S. companies. In 2019, 89% of the S&P 500 Index had implemented a resignation policy for directors failing to receive majority shareholder support, compared to 65% in 2009.
Today, most U.S. companies still elect directors by
a plurality vote standard.
Under that standard, if one shareholder holding only one share votes in favor of a nominee (including that director, if the director is a shareholder),
that nominee “wins” the election and assumes a seat on the board. The common concern among companies with a plurality voting standard is the possibility that one or more directors would not receive a majority of votes, resulting in “failed elections.”
If a majority vote standard were implemented, a nominee would have
to receive the support of a majority of the shares voted in order to be elected. Thus, shareholders could collectively vote to reject a director they believe will not pursue their best interests.
Given that so few directors (less than 100 a year) do not receive
majority support from shareholders,
we think that a majority vote standard is reasonable since it will neither
result in many failed director elections nor reduce the willingness of qualified, shareholder-focused directors to serve in the future.
most directors who fail to receive a majority shareholder vote in favor of their election
do not step down, underscoring the need for true majority voting.
We believe that a majority vote standard will likely lead
to more attentive directors
Although shareholders only rarely fail to support directors, the occasional majority vote against a director’s election
will likely deter the election of directors with a record of ignoring shareholder interests. Glass Lewis will therefore generally support proposals calling for the election of directors by a majority vote, excepting contested director elections.
In response to the high level of support majority voting has garnered, many companies have
voluntarily taken steps to implement majority voting or modified approaches to majority voting. These steps range from a modified approach requiring directors that receive a majority of withheld votes to resign (i.e., a resignation policy) to actually requiring a majority vote of outstanding shares to elect directors.
We feel that the modified approach does not go far enough because
equiring a director to resign is not the same as requiring a majority vote to elect a director and does not allow shareholders a definitive voice in the election process. Further, under the modified approach, the corporate governance committee could reject a resignation and, even if it accepts the resignation, the corporate governance committee decides on the direc-tor’s replacement. And since the modified approach is usually adopted as a policy by the board or a board committee, it could be altered by the same board or committee at any time.
Glass Lewis believes multi-class voting structures are
typically not in the best interests of common shareholders. Allowing one vote per share generally operates as a safeguard for common shareholders by ensuring that
those who hold a significant minority of shares are able to weigh in on issues set forth by the board.
we believe that the economic stake of each shareholder should
match their voting power and that no small group of shareholders, family or otherwise, should have voting rights different from those of other shareholders.
On matters of governance and shareholder rights, we believe shareholders should have
the power to speak and the opportunity to effect change. That power should not be concentrated in the hands of a few for reasons other than economic stake.
We generally consider a multi-class share structure to reflect
negatively on a company’s overall corporate governance. Because we believe that companies should have share capital structures that protect the interests of non-controlling shareholders as well as any controlling entity, we typically recommend that shareholders vote in favor of recapitalization proposals to eliminate multi-class share structures. Similarly, we will generally recommend against proposals to adopt a new class of common stock.
In the case of a board that adopts a multi-class share structure in connection with an IPO or spin-off within the past year, we will
generally recommend voting against all members of the board who served at the time of the IPO if the board: (i) did not also commit to submitting the multi-class structure to a shareholder vote at the company’s first shareholder meeting following the IPO; or (ii) did not provide for a reasonable sunset of the multi-class structure (generally seven years or less). If the multi-class share structure is put to a share- holder vote, we will examine the level of approval or disapproval attributed to unaffiliated shareholders when determining the vote outcome.
When analyzing voting results from meetings of shareholders at companies controlled through multi-class structures,
we will carefully examine the level of approval or disapproval attributed to unaffiliated shareholders Wwen determining whether board responsiveness is warranted. Where vote results indicate that a majority of
unaffiliated shareholders supported a shareholder proposal or opposed a management proposal, we believe
the board should demonstrate an appropriate level of responsiveness.
Cumulative voting increases the ability of minority shareholders to
elect a director by allowing shareholders to cast as many shares of the stock they own multiplied by the number of directors to be elected.
As companies generally have multiple nominees up for election, cumulative voting allows
shareholders to cast all of their votes for a single nominee, or a smaller number of nominees than up for election, thereby raising the likelihood of electing one or more of their preferred nominees to the board. It can be important when a board is
controlled by insiders or affiliates and where the company’s ownership structure includes one or more shareholders who control a majority-voting block of company stock.
Glass Lewis believes that cumulative voting generally acts as a
safeguard for shareholders by ensuring that those who hold a significant minority of shares can elect a candidate of their choosing to the board. This allows the creation of boards that are responsive to the interests of all shareholders rather than just a small group of large holders.
We review cumulative voting proposals on
a case-by-case basis, factoring in the independence of the board and the status of the company’s governance structure
But we typically find these proposals on ballots at
companies where independence is lacking and where the appropriate checks and balances favoring shareholders are not in place. In those instances we typically recommend in favor of cumulative voting.
Where a company has adopted a true majority vote standard (i.e., where a director must receive a majority of votes cast to be elected, as opposed to a modified policy indicated by a resignation policy only), Glass Lewis
will recommend
voting against cumulative voting proposals due to the incompatibility of the two election methods.
For companies that have not adopted a true majority voting standard but have adopted some form of majority voting,
Glass Lewis will also generally recommend voting against cumulative voting proposals if the company has not adopted anti-takeover protections and has been responsive to shareholders.
Where a company has not adopted a majority voting standard and is facing both a shareholder proposal to adopt majority voting and a shareholder proposal to adopt cumulative voting,
Glass Lewis will support only the majority voting proposal.
When a company has both majority voting and cumulative voting in place,
there is a higher likelihood of one or more directors not being elected as a result of not receiving a majority vote. This is because shareholders exercising the right to cumulate their votes could unintentionally cause the failed election of one or more directors for whom shareholders do not cumulate votes.
Glass Lewis believes that supermajority vote requirements
impede shareholder action on ballot items critical to shareholder interests. An example is in the takeover context, where supermajority vote requirements can
strongly limit the voice of shareholders in making decisions on such crucial matters as selling the business. This in turn degrades share value and can limit the possibility of buyout premiums to shareholders. Moreover, we believe that a supermajority vote requirement can enable a small group of shareholders to overrule the will
of the majority shareholders. We believe that a simple majority is appropriate to approve all matters presented to shareholders.
